Do We Have A Student Loan Or College Quality Crisis?

Student lending is having an increasingly large impact on your credit union whether or not it provides private student loans. First, With student debt now surpassing $1 trillion it is one of the factors explaining why millennials haven’t helped prime the economy by buying that first home. And, Of course, if your credit union is one of the increasing numbers of institutions that has jumped into the private student loan market in recent years, you know firsthand about the opportunities and challenges posed by this market. A report recently issued by the Brookings Institute has both operational implications for those of you making these loans and provides further evidence for those of us who believe that the cost of college is one of the key policy issues facing this nation. To be clear the research dealt with government guaranteed student loans but I’m assuming that many of its conclusions are applicable to the private student loan market.

So what did these researchers find? That increasing student loan default and delinquency “are largely due to increases in” the number of borrowers taking out loans to attend for-profit colleges and two-year community colleges. These nontraditional borrowers “were disproportionately older, independent of their parents, from lower-income families, and living in more disadvantaged areas.” Why do these conclusions matter? From an operational standpoint they underscore just how important it is to take the quality of the institutions your members are attending into account when establishing student loan policies. On a policy level, it’s possible that we have as much of a college quality crisis as we do a student loan problem

For those of you who provide private student loans this research should be kept in the same file as the Supervisory Guidance on Private Student Loans that NCUA posted in December of 2013.( Supervisory Letter No.: 13-13.) This is a guidance that I am embarrassed to admit I haven’t highlighted in a previous post. In it NCUA explains its expectations for sound underwriting practices involving student loans. It explains, for example, that “the performance of PSLs can vary significantly by cohort (e.g., field of study and degree, school attended, and graduation year relative to the economic cycle) as a result credit unions are expected to fully evaluate the credit risk of their PSLs by conducting a risk analysis for the different cohorts.” This research shows that not all those factors have an equal impact on delinquency-the quality of the school may matter the most.

The tricky part is that too inflexible approach to student lending is going to lose you potential members. Providing a helping hand to someone striving to get ahead is one of the reasons we have credit unions in the first place.

In addition Student lending, particularly if done on a large enough scale, also raises potential fair lending issues via the Equal Credit Opportunity Act. For example, let’s assume you receive applications from members planning to attend both four-year colleges and for-profit institutions. According to the researchers “ attending a for-profit or 2-year institution is correlated with living in a more disadvantaged area, being lower income, and having worse labor market outcomes,” As a result, it’s quite possible that a facially sound underwriting policy may result in a disproportionate number of your rejected loan applicants being from protected classes. In fact, in its guidance NCUA reminds credit unions that PSL loans are subject to the Equal Credit Opportunity Act.

The big winner in last night’s Republican debate was former HP CEO Carly Fiorina She showed its possible be a political outsider, have a firm grasp of policy and politics (Sorry Ben Carson and Donald T), and be both aggressive and passionate without being an obnoxious name calling loud-mouth (Sorry Donald). For those of you looking for an outsider at any cost she is the one for you.